There’s nothing like reviewing Volfefe while enjoying your morning covfefe.
JPMorgan’s index ‘Volfefe’ measures the impact of President Donald Trump’s tweets on interest rates and other economic indicators. The index is clever and useful because it explores how investors can account for the president’s public commentary in their trading decisions.
Here is everything you need to know about the Volfefe Index.
What exactly does the Volfefe Index do?
It quantifies the effects of Trump’s tweets on implied volatility in the bond market.
Implied volatility reflects how much market participants expect interest rates to fluctuate. JPMorgan has typically derived implied volatility from swaption prices; swaptions are options to enter interest-rate swaps. Swaptions are more expensive when market participants think interest rates are going to fluctuate, such that investors who buy swaptions will want to exercise them.
Expectations about interest-rate volatility affect the bond market. When investors are worried about inflation or the health of the economy, treasury yields fall.
Treasury yields influence the prices of stocks and other investment products.
How did JPMorgan create the index?
The bank used machine learning techniques and their own volatility model to measure which Trump tweets created big movements in interest rates. The bank looked for similarities between the apparently market-moving tweets.
What has the index found?
Trump’s tweets explain a large fraction of interest-rate volatility, especially in the market for short-term Treasury bonds, with two- and five-year securities more impacted than 10-year securities.
Tweets that have shown the biggest impact involve trade, the Federal Reserve and monetary policy, according to JPMorgan’s report. Keywords include “China,” “billion” and “tariffs.”
The model found that, of the 4,000 non-retweets occuring during market hours from 2018-present, 146 tweets moved the market.
Why do these findings matter?
They isolate the effects of policy uncertainty on markets. They demonstrate how the president, through his tweets, stirs uncertainty about interest rates and in turn makes financial products more expensive.
Volfefe shows how the president makes investing more difficult in a quantifiable way.
How have other banks explored the impact of Trump’s tweets?
Citigroup has found that the president’s tweets are generally followed by higher volatility across global currency markets, according to a report by Citigroup quantitative foreign-exchange strategist Sukrita Chatterji.
Bank of America Merrill Lynch published a note last week concluding that days during which Trump tweets relatively frequently tend to correlate with negative stock returns of 9 points on average. Days wherein Trump tweets relatively less tend to correlate with positive returns of 5 points on average.
How has the S&P 500 fared since Trump’s election?
The S&P 500 remains well above where it was before Trump’s 2016 election—up nearly 40%.